Agency business cycles

We develop a theory of endogenous and stochastic fluctuations in economic activity. Individual firms choose to randomize over firing or keeping workers who performed poorly in the past to give them an ex-ante incentive to exert effort. Different firms choose to correlate the outcome of their randomi...

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Bibliographic Details
Published in:Theoretical economics 2020, Vol.15 (1), p.123-158
Main Authors: Golosov, Michail Ju, Menzio, Guido
Format: Article
Language:English
Subjects:
Business cycles
Companies
coordinated randomization
D86
Dismissal
E24
E32
Economic activity
Economic conditions
Economic models
Economic theory
Employee dismissals
Employment contracts
Endogenous
Endogenous and stochastic cycles
Equilibrium
Labor market
Labor productivity
Moral hazard
Stochastic models
Stochastic processes
Unemployment
Unemployment benefits
unemployment fluctuations
Wages & salaries
Workers
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Summary:We develop a theory of endogenous and stochastic fluctuations in economic activity. Individual firms choose to randomize over firing or keeping workers who performed poorly in the past to give them an ex-ante incentive to exert effort. Different firms choose to correlate the outcome of their randomization to reduce the probability with which they fire non-performing workers. Correlated randomization leads to aggregate fluctuations. Aggregate fluctuations are endogenous---they emerge because firms choose to randomize and they choose to randomize in a correlated fashion---and they are stochastic---they are the manifestation of a randomization process. The hallmark of a theory of endogenous and stochastic fluctuations is that the stochastic process for aggregate "shocks" is an equilibrium object.
ISSN:1555-7561
1933-6837
1555-7561
DOI:10.3982/TE3379